What should one look for in a Profit and Loss account?

For a company, the profit and loss statement is the most important document presented to the shareholders. Therefore, each company tries to give maximum stress on its representation/ misrepresentation. One should consider the following:

•  Whether there is an overall improvement of sales as well as profits (operating, gross and net) over the similar period (half-yearly or annual) previous year. If so, the company’s operational management is good.
•  Check for the other income carefully, for here companies have the scope to manipulate. If the other income stems from dividend on the investments or interest from the loans and advances, it is good, because such income is steady. But if the other income is derived by selling any assets or land, be cautious since such income is not an annual occurrence. 
• Also check for the increase of all expenditure items viz. raw material consumption, manpower cost and manufacturing, administrative and selling expenses. See whether the increases in these costs are more than the increase in sales. If so, it reveals the operating conditions are not conducive to making profits. Similarly, check whether ratio of  these costs to sales could be contained over the previous year. If so, then the company’s operations are efficient. 
• Evaluate whether the company could make profit from its operations alone. For this you should calculate the profits of the company, after  ignoring all other income except sales. If the profit so obtained is positive, the company is operationally profitable, which is a healthy sign. 
• Scrutinize the depreciation as well as interest for any abnormal increase. The increase in depreciation is attributed to higher addition of fixed assets, which is good for long term operations of the company. High depreciation may suppress the net profits, but it’s good for the cash flow. So instead of looking out for the net profits, check the cash profits and compare whether it has risen. High interest cost is always a cause of concern because the increased debt burden cannot be reduced in the short run.   
• Calculate the earnings per share and the various ratios. In case of half yearly results, multiply half yearly earnings per share by 2 to get approximately the annualized earnings per share.